One reason why PCX surged Tuesday was the rally in the broad market indices. PCX has a high beta of 2.9, so the stock likely benefited from the move higher in the Dow and S&P 500.

Sector Rally

In addition to the broad market rally, the coal sector also was lifted after a report from Bloomberg discussed increased coal demand from Europe. As shown by the chart below, PCX was the leader on Tuesday by a significant margin. While James River Coal (JRCC), Alpha Natural Resources (ANR), Peabody Energy (BTU), Arch Coal (ACI), and Consol Energy (NYSE:CNX) all moved higher, PCX was the standout.

It should be noted that the second biggest winner was James River Coal. This is noteworthy because PCX and JRCC have a much higher short interest than the rest of the steel sector. This likely means that a good part of Tuesday's move in PCX was driven by short covering.

Short interest in PCX currently stands at roughly 25.48 million or 28% of the float. It is likely that part of Tuesday's move was a short squeeze. However, it should be noted that the short interest likely remains high and the potential for the squeeze to continue is high.

Playing Catch-UP

Despite Tuesday's surge higher, PCX is still the worst performing coal stock over the past month. Part of Tuesday's move was likely PCX catching-up to what other names in the sector have already done.

In a piece written just days ago, I raised questions about the weak relative performance of the sector and suggested that short-term traders move to the sidelines. However, given Tuesday's move across the sector, it might be time for traders to once again go long coal.

In my previous commentary, I have consistently said that I would avoid PCX as it is the most risky name in the sector. That being said, because of the massive volume, more than 17 million shares in a shorted trading session, it appears that institutional money believes the worst is behind PCX. However, I am not yet certain that PCX is in the clear and for that reason I would continue to favor other coal stocks over PCX.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.